Value Judgments in Economics

Simply stated, economics is the science of how society produces and distributes scarce resources. In this sense, economics necessarily requires that economists make value based judgments when prescribing economic policies – is this method/pattern of distribution desirable? Says who?

Despite this, mainstream economists generally insist that their science is value free. In this post I will discuss some of the main value judgments I believe are implicit in economics, though I will not really evaluate them – the post is mainly aimed at establishing value judgments exist in economics.

I consider much of what I am claiming about economic theory uncontroversial, so I will not offer extensive supportive evidence, but am happy to if any claims are disputed.

Economists emphasise the distinction between normative and positive economics, but they often forget that – even presuming we can reliably separate the two – the decision to study one over the other is itself a value judgment, and therefore a normative decision. This is, quite simply, because a value judgment is about whether something is desirable or not – if we believe it is more desirable to study either positive or normative economics, we have made a value judgment. So from the beginning, value judgments enter into the equation, no matter how hard we try to make it otherwise.

Furthermore, the decision about which area to study has normative implications, even if it is studied from a purely positive perspective. It is important which questions economics asks. Does economics ask questions about either work or consumption? Does economics ask questions about recessions, or booms? Time itself being a scarce resource, the economist must choose what to study. This too implies a judgment about how time should be distributed – studying something implies the area is important; not studying it implies the opposite.

The assumption that efficiency is desirable is a core value judgment in economics. Efficiency generally translates as ‘more stuff for cheaper,’ at least in the absence of externalities, and is sometimes equated with social welfare. Policies are often judged on the grounds of whether or not they are ‘pareto efficient’ – whether nobody can be made (materially) better off without making somebody worse off.

So, according to economists, why is a higher quantity of goods and services at a lower price a good thing? Because people gain utility from consuming goods and services – utility is, by definition, a good thing, as it represents people’s underlying ‘preferences’ – what they judge that they want.

By extension, choice is good because it allows consumers more avenues by which to maximise their utility. Markets, as well as capitalism, are generally desirable, because they provide choice and utility for consumers. Competition is generally presumed to increase the quantity of goods provided and lower the price. Again: this is more ‘efficient,’ and efficiency is good, so competition itself is good. Growth is good on similar grounds (though also on other ones, such as creating employment). Even though economists admit that there may be negatives to growth, it is generally presumed that we’d want growth in absence of these negatives: taken in isolation, growth is desirable.

However, as the above quote shows, the desirability of policies is not limited to a lower price and higher quantity. If externalities are present, then we shift from merely ‘higher quantity, lower price’ to ‘the right quantity and price.’ Another value judgment – that imposing costs (benefits) on others must be disincentivised (incentivized) – has entered the equation, and textbooks generally presume that these injustices must be corrected.

Economists often counter that efficiency is simply studied technocratically, and the judgment about it being desirable is external. But, as above, that efficiency is deemed the appropriate criterion by which to study a market economy is already a judgment. And most textbooks/lecturers make the jump from descriptive to prescriptive:

First we show how a perfect market economy could under certain conditions lead to ‘social efficiency.’ … [we then] show how markets in practice fail to meet social goals. These failures provide the major arguments in favour of government intervention in a market economy.

‘Social efficiency’ here is defined as above – more stuff for cheaper; with externalities, the ‘correct’ amount of stuff at the correct price.

There are also some obvious economic value judgments which are so ingrained into everyone’s minds that few would disagree with them (Austrians might take exception to the 2nd): too much inflation is bad, deflation is bad, and too much unemployment is bad. Economic theory emphasises the (supposed) ‘trade-off’ between inflation and unemployment, and where we want to draw the line is also a value judgment.

I don’t think it is possible to study economics without some value judgments. But these should not be cloaked in the guise of objectivity and inevitable economic ‘laws,’ which usually contain judgments about how important efficiency and production are (‘it will impact the consumer’). Instead, economists should be open about the values implicit in their subject, and how these impact their analysis and policy conclusions.

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  1. #1 by QP on September 9, 2012 - 8:46 pm

    “Politics” in other words. I would say most economists would like to claim to be apolitical but politics and economics are inseparable in my opinion.

    I also find it interesting how so much economic policy relies on monetary metrics (e.g. inflation and deficits) when clearly money is an abstraction from the “real” economy of the distribution and use of resources. Why abstracted metrics over real metrics such as employment levels?

    • #2 by Unlearningecon on September 11, 2012 - 1:48 pm

      I don’t think there’s a problem with using money for things like inflation, where it is obviously useful. The problem arises when economists say we can put a price on somebody losing an arm etc.

  2. #3 by john77 on September 9, 2012 - 8:50 pm

    Of course you are right.
    It is mildly worrying that you feel it is necessary to explain this.
    Although I regard “greater efficiency” as “less cost and effort to produce the same or a better result”. To use “efficiency” to mean “an improvement in efficiency” is an appalling misuse of language (I’m not accusing you being the perpetrator).

    • #4 by Unlearningecon on September 11, 2012 - 1:50 pm

      I think I am the perpetrator to be honest, and should have worded it as ‘efficiency is measured by how high the number of goods and services provided is, and how low the price at which they are provided is.’

  3. #5 by AMT on September 10, 2012 - 12:51 am

    Thanks for this post!

    I still remember a section of a book, “The Burgess Shale” (by Gould, I think), that was excerpted in one of my undergrad poli sci course readers. The argument of the excerpt was similar to the point you are making here: no subject, whether it bills itself as a softer or harder science, is entirely normative. The decision to pursue a course of study is a judgement call rooted in a person’s values, and the formulation of a hypothesis is likewise informed by values. Instinct and intuition are as important to scientific research, at least in terms of formulating the question to be considered, as methodology and data.

    Interesting that economists seem to be exceptionally resistant to accepting that their subject isn’t purely normative. In a recent grad course, I was struck at the professor’s insistence that the class would be primarily positive in its focus when the topic was ‘natural resource economics’ and he assigned his own book as the main course reading, a text that was so filled with gross generalizations and condescending treatment of environmentalists it was fairly obvious he had an axe to grind.

    Naturally, evidence presented that disagreed with this professor’s stances was met with hostility, even when rooted in established, fairly unbiased science. He even insisted that (for the class project) any articles coming out of the journal “Ecological Economics” had to be cleared by him before being used – pretty much because he didn’t like the journal. I felt bad for the other grad students in there. They were primarily science types, with little economic background, and I felt like he completely turned most of them off to the potential utility of economics in their own research.

    All this goes back, I feel, to one of the fundamental problems with so many economists: presented with positive data that contradicts their values, they ignore or belittle it, often on purely normative or abjectly rhetorical grounds.

    • #6 by Unlearningecon on September 11, 2012 - 1:52 pm

      I assume you mean ‘no science is entirely positive?’

      Indeed the first two are not specific to social science, something I should have mentioned. Economist’s attitude is substantially in part to Friedman’s 1953 reality-denying essay, which I am sure you are aware of.

      Thanks for a good comment.

      • #7 by AMT on September 11, 2012 - 2:49 pm

        Yes, thank you, you are correct, and that is what I meant.

        Had to review the main points of the Friedman paper to refresh my memory. His argument seems to amount to, in effect, a blank check for social scientists to hand wave away criticism that threatens their pet theories. It actually seems like a self-aware attempt to provide exactly that cover.

        *note, I don’t mean to harp on all social scientists. My research tends to bounce between harder and softer sciences, and I find valuable insights in both.

      • #8 by Unlearningecon on September 11, 2012 - 2:52 pm

        Indeed the paper was written deliberately to do that, shortly after evidence was presented that completely contradicted the marginalist theory of the firm (you will see him reference the ‘marginalist controversy’ in his paper).

  4. #9 by wh10 on September 10, 2012 - 1:20 am

    Michael Sandel at Harvard argues very much against the case that economics doesn’t make value judgments throughout his new book – http://www.amazon.com/What-Money-Cant-Buy-Markets/dp/0374203032.

    The book is about how to think about evaluating whether a free market for a specific good or service is desirable. Sandel comes from a philosophy background and brings ethics into the discussion, which economists are often loathe to do. One argument he offers against markets is that they tend to corrupt the way we value goods or services in an ethically corrosive manner. We need to weight the benefits of markets against their cons (of which that argument is one) in order to decide where markets belong.

    It’s a very interesting book, although I wish it dived deeper. In any case, you might be interested in checking it out.

    • #10 by Unlearningecon on September 11, 2012 - 1:53 pm

      Yes I have seen that book and it looks interesting. Sandel’s key point appears to be that in economics, goods and services are inalienable, and not affected by the price we pay for them (or whether there’s a price at all). But a moment’s introspection reveals this is not the case.

  5. #11 by Stefan on September 10, 2012 - 10:57 am

    If economists actually would care about efficiency, they would be the biggest supporter of governement run health care and retirement systems. Every study shows that thay are way more efficient in terms of administrative costs, interest, advertising, commissions and so on. There is something es to it: Economomists only “prove” that something is “efficient” in relation to property claims involved. So if you don’t have any money it’s ‘efficient’ for the market not to provide you with health care. Which is an absolute circular notion of “efficiency”.

    • #12 by AMT on September 10, 2012 - 3:49 pm

      Nice point. Especially with respect to property – I always find it amusing that economists seem to take property rights for granted, as if property isn’t a social construct backed by custom, history, law, who has the most guns, etc.

      I do get the impression that the majority of economists are probably pro-national healthcare of some stripe, since not having everyone in the market creates a nasty adverse selection problem. But it does seem like another case where many basically seem to say “government is bad, mmkay, except when we need it to function as a deus ex machina to make our models work.

      • #13 by Unlearningecon on September 11, 2012 - 1:58 pm

        Yes taking capitalism as a given is an example of my second point – if we are not debating capitalism as a system, then we’ve basically given it a stamp of approval or classed it as inevitable.

    • #14 by Unlearningecon on September 11, 2012 - 1:57 pm

      In fairness I expect you’ll find more economists supporting public health than you might think, given the general impression those like Lucas and Prescott give to the public. See, for example, Kenneth Arrow’s paper on healthcare.

  6. #15 by J St. Clair on September 10, 2012 - 2:18 pm

    ‘Competition is generally presumed to increase the quantity of goods provided and lower the price”…………really?…….let’s look at one example for now….i could list more……cosco…int’l branches….aka quantity of goods….= lower prices?……i don’t think so…..same with all the companies that have mass branches…..mass branches = mass production = mass resource draw mass inventory =lower quality = lower wages = few people working =

    • #16 by Unlearningecon on September 11, 2012 - 1:59 pm

      I’m not sure what your saying – sweatshops, bad as they may be, do tend to lower price and increase quantity.

  7. #17 by Eric L on September 12, 2012 - 4:05 pm

    The biggest, most corrosive, and most ignored value judgement implicit in much of economic theory is that a dollar is a consistent measure of value across people. At the most basic level economists are aware of this; what people are willing to pay for something is a function of its utility and their budget, and as their budget increases they will purchase lower utility things. But once you move past an individual it is more convenient to use the concrete “willingness to pay” as a proxy for utility. An efficient market is one that will not produce a good one person would have payed $10 for if it could have produced a good a different person would have payed $100 for instead. Likewise it is convenient to ignore individual budgets when considering external costs — for example it is commonly assumed that if you wouldn’t pay $1,000,000 to prevent some harm from happening to you, then you would happily accept $1,000,000 to give up your right to not have that harm, but these are not the same situation.

    Another example of this is valuing human life — any economic valuation of human life will show that an American life is worth more in dollars than a Bangladeshi life, and a wealthy American’s life is worth more still. But these kind of studies could actually provide an empirical way out of this nonsense — wouldn’t it make more sense to assume that most people across the world value their own life similarly, and what studies measuring the dollar value of a life actually show is the life value of a dollar, or the relative value of what people in different situations need to spend a dollar on?

    • #18 by Unlearningecon on September 12, 2012 - 4:44 pm

      The methods they use by which to classify human life are absurd. There are many examples, but one is that they take wage differentials between industries with different levels of safety, and try to adjust for other factors, then take the remaining difference as an indicator of how people value their lives.

      Where to start? Massive statistical uncertainty, for a start; the implicit assumption that people control their wages; the implicit assumption that people know and correctly perceive risk. It’s barely worth evaluating.

      Willingness to pay is only defensible if incomes are the same. They are not, so the method is simply bunk.

      • #19 by Min on September 12, 2012 - 7:27 pm

        I am starting to think that, as crowd-sourcing mechanisms by which communal decisions are made, markets tend to plutocracy. Does that make sense?

      • #20 by Unlearningecon on September 13, 2012 - 1:18 pm

        Yes, they do. If a dollar = a vote, the rich have more say, and it creates a spiral. Soon you will be one of us, min.

      • #21 by john77 on September 12, 2012 - 10:44 pm

        The value of human life is, and always has been, subjective.
        Weregild was not a fixed amount

      • #22 by Eric L on September 13, 2012 - 7:05 am

        The methods they use by which to classify human life are absurd.

        Of course. The attempt to attach dollar values to human life is absurd.

        Willingness to pay is only defensible if incomes are the same. They are not, so the method is simply bunk.

        My point exactly, but what would be less bunk? You can complain all day about ways that economists hide behind numbers when they are really making subjective judgements (and be entirely correct in your complaint) or you can show that there are other measurable “objective” quantities you can use, ones that are at least as good as the one economists prefer. Determining the relationship between income and the measured dollar value of a human life, then using that relationship to correct willingness to pay for income and get a measure of value in equivalent human lives, is one possible way to do that. Does the measure have its own problems? Absolutely. But having some empirically justifiable way to apply an income correction to willingness to pay would make it harder for economists to dismiss concerns about WTP on the grounds that it is objective and everything else is subjective.

      • #23 by Unlearningecon on September 13, 2012 - 1:25 pm

        Indeed, adjusting for income might be better. However, once you have more than one item in a budget set it’s hard to evaluate people’s decisions to pay for items independently of each other. Overall, I’m going to throw my hands up and say I don’t think we can assign any measure to certain things.

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